CyrusOne: Solid Mid-Cap With Management Turmoil And Possible M&A
Summary
- CyrusOne is in solid shape financially.
- However, management is in turmoil, and growth prospects are slowing.
- It is no rumor: CyrusOne management has gone looking for a buyer.
- Whether they will find one or not remains to be seen.
KaeArt/iStock via Getty Images
Meet the Company
CyrusOne (NASDAQ:CONE) is a REIT that specializes in enterprise-class, carrier-neutral data center properties. The company seeks to grow by building new centers swiftly, and by providing scalability and reliability for their customers. With more than 50 data centers in 11 U.S. markets (New York, Northern Virginia, Chicago, Cincinnati, Raleigh-Durham, Houston, San Antonio, Austin, Dallas, Phoenix, and Council Bluffs) and 6 European markets (Frankfurt, London, Paris, Amsterdam, Dublin, and now Madrid), CyrusOne is the third largest data center REIT based in the U.S. by market cap...
...and the 5th largest data center operator in the world by revenue.
Source: Hoya Capital, "Data Center REITs: Go Big or Go Home"
The two larger REITs, Equinix (EQIX) and Digital Realty (DLR) dwarf CyrusOne in size as measured by market cap. Equinix is roughly 8 times as large, and Digital Realty almost 5 times as large.
Just over 50% of the CyrusOne's revenue comes from IT Cloud customers, with the rest diversified across Financial Services (13%), IT Enterprise customers (8%), Telecommunication (5%), as well as Industrials, Energy, Health Care, and IT Managed Services, all under 5% each. This high percentage of IT Cloud customers means CONE is getting squeezed more than most of the smaller data center REITs, as two-thirds of public cloud demand comes from just 4 companies (Amazon (AMZN), Google (GOOG) (GOOGL), Microsoft (MSFT), and Alibaba (BABA)), giving the tenants significant leverage in negotiating rents.
CyrusOne has 146,000 colocation square feet (CSF) of rentable space currently, with 51,000 in the U.S. and 95,000 in Europe. In addition, it has nearly double that amount (286,000 CSF) in the development pipeline already, with 160,000 of that in Europe and the other 120,000 in the U.S., according to its Q2 2021 earnings call on July 29.
Growth Metrics
The company reported solid but unspectacular YoY revenue growth of 11%, and FFO growth of 4%. Here is what the 5-year FFO growth picture looks like:
| Year | Funds From Operations (FFO) | FFO Growth Rate | Total Cash From Operations (TCO) | TCO Growth Rate |
| 2016 | $186 M | -- | $181 M | -- |
| 2017 | $203 M | 9.1% | $290 M | 60.2% |
| 2018 | $327 M | 61.1% | $309 M | 6.6% |
| 2019 | $451 M | 37.9% | $366 M | 18.4% |
| 2020 | $493 M | 9.3% | $456 M | 24.6% |
| 2021* | $533 M | 8.1% | $452 M | (-0.9%) |
| 5-year CAGR | 23.4% | 20.1% |
* projected by doubling H1 2021 figures
Source: TD Ameritrade
This is robust, double-digit growth over 5 years, characteristic of a FROG, but slowing considerably over the past two, and the company projects "mid-single digit" growth for the coming year, according to the Q2 2021 earnings call. The Seeking Alpha Quant Ratings give CyrusOne a grade of A- for growth.
CyrusOne sits in the upper mid-cap sweet spot, as identified by Hoya Capital in their seminal research article, "The REIT Paradox: Cheap REITs Stay Cheap."
Balance Sheet
The company currently sports an Assets/Liabilities ratio of 1.58, missing the FROG cutoff of 1.66 by only a little. The 5-year balance sheet history is as follows:
| Year | Assets | Liabilities | Ratio |
| 2016 | $2852 M | $1690 M | 1.69 |
| 2017 | $4312 M | $2598 M | 1.66 |
| 2018 | $5593 M | $3367 M | 1.66 |
| 2019 | $6142 M | $3707 M | 1.66 |
| 2020 | $6897 M | $4339 M | 1.59 |
| 2021* | $7241 | $4585 | 1.58 |
* as of Q2 2021
These are healthy numbers, showing just gradual slippage. Up until two years ago, CyrusOne was a bona fide FROG.
Still, the company does not face any significant liquidity challenges. They have no debts maturing until November of 2024, and current liquidity of $2.28 billion.
Which way is the wind blowing?
Data centers enjoy strong tailwinds but are also fighting significant headwinds.
First the tailwinds. Big data analytics, the Internet of Things, the 5G rollout, internet TV, smart phones and social media are all driving an increase in internet usage that fuels data center demand. As Daniel Jones put it in his May 28 article:
One truth has become certain over the past couple of decades. And that is that the future will be ruled by data. As our data demands increase, so too will our need for the infrastructure that handles it." One truth has become certain over the past couple of decades. And that is that the future will be ruled by data. As our data demands increase, so too will our need for the infrastructure that handles it."
Data center spending by companies large and small is only expected to grow. Meanwhile there are high barriers to entry for potential new competitors, as follows:
- Most existing points of dense interconnection are already owned by data center providers
- Building dense network and cloud ecosystems generally takes 10+ years
- Scale, purchasing power and expertise reduce costs
- National platform and existing customer base are important to enterprises that seek national MSAs and network / cloud companies that want an ecosystem of companies to sell their services.
These factors combine to build a significant moat around the existing players.
Now the headwinds. About two-thirds of global public cloud market share is accounted for by just 4 companies - Amazon, Microsoft, Google, and Alibaba. This give the tenants significant negotiating power in setting the lease terms with the landlords. More than half (53%) of CyrusOne's revenue comes from these huge tenants, so the squeeze is on.
According to Hoya, the only way to grow in this sector is to expand footprint.
With flat-to-negative "same-store NOI" growth rates, external growth continues to be the modus operandi and primary driver of growth for these companies as Data Center REITs have been relentless developers and acquirers over the last half-decade.
CyrusOne is doing just fine in this regard. Their pipeline under development of 286,000 CSF would nearly triple their rentable square footage, and 86% of that pipeline is already pre-leased, which significantly lowers their expansion risk.
What could go wrong?
In addition to the aforementioned headwinds, CyrusOne has one huge problem of its own making: management appears to be in turmoil. As of July, the company had gone through no less than 4 CEOs in a period of just 18 months, as noted by Colby Synesael with Cowen on the latest earnings call.
Making matters worse, the acting CEO, co-founder Dave Ferdman, refuses to provide any information on how the company will find its next CEO, any timeline (even speculative) for the hire, nor even any criteria as to what the company will be looking for in its next head honcho. This is unsettling for most investors.
Adding to the appearance of major trouble, CyrusOne is now "exploring strategic alternatives," including looking for a potential buyer, according to Reuters.
This is an open invitation to speculators, and may artificially pump up the stock price for a while, as long as the rumors persist. But no potential buyer has yet been named.
In a July 18 article for Seeking Alpha, Matthew Utesch calculated a projected price in the event of a merger, based on the purchase price QTS Realty (QTS) recently commanded when it was bought by Blackstone (BX):
Using a 23x-25x 2022 estimated EBITDA multiple CONE would look at a $95-$106/share purchase price or a 27%-42% premium over the current share price.
The share price has since run up to $77.41, but that still leaves room for a premium of 21%-35%, by Utesch's calculations. That is an attractive proposition, if a buyer can be found, but there are only 4 data center operators that are bigger than CyrusOne, and only two of them are U.S.-based REITs: San Francisco-based Digital Realty (DLR) and Redwood City-based Equinix (EQIX). The other two data center operators are Japanese, and not as large as DLR and EQIX.
As Hoya notes, both DLR and EQIX are sitting on a lot of "dry powder", but neither has yet to make a move in the predicted flurry of M&A activity in this sector over the past 12 months. If one of them swallows up CONE, the other might logically make a run at debt-ridden U.S.-only CoreSite (COR), but I have neither seen, read, nor heard any specific rumors to that effect.
Bottom Line
The Seeking Alpha Quant Ratings show CONE as a solid hold (3.00). It gets high marks for Growth and Revisions, passing grades for Profitability and Momentum, but a D+ for Value, based mostly on its 2.67% dividend yield. Beats the pants off the 1.43% yield for EQIX, but falls short of the 3.16% offered by DLR and the 3.61% offered by similar-sized competitor COR. CONE has been growing its dividend by a respectable 8.18% CAGR over the past 4 and a half years.
The Seeking Alpha authors concur with the Hold sentiment, but the 22 Wall Street analysts covering the company are bullish (3.86) on the whole, with 12 bulls and no bears. Zacks Investment Research rates CONE a Hold, and so do The Street and Ford Equity Research.
The company is in solid shape financially. It has room to grow with low risk. If management can get its house in order and put a CEO in place who can provide some stability, then CONE can be viable for several years to come. If you are holding CONE shares, there is no need to get rid of them. If a buyer materializes, there could be a major reward in store. However, there is not enough to go on to warrant buying share purely on that hope. I rate this company a Hold.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of EQIX, DLR, CONE, COR either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
Recommended For You
Comments (22)
Would be fantastic to be able to cash out nicely before y.e.
I haven’t crunched the numbers but a stock for stock deal by IRM might be at least neutral and possibly accretive to earnings. But it would certainly boost the multiple given to IRM by transforming their identity and overcoming concerns about the long-term decline of their legacy business.